ACCA · Question 08 · Risk Management
Section A
Horizon Builders expects to borrow $10 million in 3 months' time for a period of 6 months. To hedge against rising interest rates, they enter into a 3-9 Forward Rate Agreement (FRA) at 5.0%. When the borrowing date arrives, the reference market interest rate (LIBOR) is 6.5%.
Which of the following statements correctly describes the outcome of the FRA?
Answer options:
Horizon Builders will pay the bank the difference between 6.5% and 5.0%.
Horizon Builders will receive a payment from the bank, compensating them for the higher interest rate.
The FRA will lapse unexercised because it is an option.
Horizon Builders must borrow the funds directly from the bank that sold the FRA at 5.0%.
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